Supply chain finance (SCF) encompassing a range of financial instruments and techniques that optimise cash flow across supply chains is an area of growing importance in Iraq’s evolving financial sector. From reverse factoring programmes that allow suppliers to receive early payment on approved invoices, to receivables financing that converts trade receivables into immediate cash, SCF techniques address the working capital challenges faced by businesses throughout Iraq’s commercial ecosystem. As the CBI develops its fintech and payment system infrastructure, the regulatory framework for SCF in Iraq is evolving. This article examines the legal and regulatory considerations for supply chain finance in Iraq.

What is Supply Chain Finance?

Supply chain finance refers to a set of technology-based solutions and financing techniques that link buyers, sellers, and financing institutions along a supply chain to optimise working capital. The principal SCF techniques include: reverse factoring (approved payables financing), a buyer-led programme in which the buyer’s bank or a specialised financier pays the supplier early at a discounted rate, in exchange for the buyer’s confirmed payment obligation; factoring the supplier sells its receivables to a factor (a bank or specialist financier) in exchange for immediate cash, with the factor collecting payment from the buyers; invoice discounting the supplier raises finance against its outstanding invoices while retaining responsibility for collection; and dynamic discounting, a buyer-funded programme in which the buyer pays suppliers early in exchange for a discount, funded from the buyer’s own cash resources.

The Iraqi Legal Framework for Receivables Financing

The legal framework for receivables financing in Iraq draws primarily on the Iraqi Civil Code’s provisions on assignment of rights. Under Articles 347 to 358 of the Civil Code, a creditor (assignor) may assign its rights against a debtor (obligor) to a third party (assignee), subject to notification of the debtor. For supply chain finance purposes, this means a supplier may assign its right to payment under a commercial contract to a bank or financier, subject to: the assigned rights being assignable under the underlying contract, many contracts contain anti-assignment provisions that must be checked; the debtor (buyer) being notified of the assignment; and the assignment not being contrary to Iraqi public policy. The Iraqi legal framework does not yet include modern receivables financing legislation equivalent to UNCITRAL’s Convention on the Assignment of Receivables.

CBI Electronic Payment and Fintech Framework

The CBI has been developing its regulatory framework for electronic payments and fintech, a development with significant implications for supply chain finance platforms that require electronic invoice confirmation, payment processing, and financing mechanisms. CBI instructions on electronic payment services and payment system oversight are evolving and companies developing SCF platforms in Iraq should monitor regulatory developments carefully. The CBI’s strategic plan for financial sector development includes goals for expanding digital financial services, a supportive backdrop for SCF product development.

AML Considerations in Supply Chain Finance

Supply chain finance transactions particularly invoice financing and factoring carry specific AML risks that Iraqi banks and financiers must manage. Key AML risks in SCF include: invoice fraud fictitious or inflated invoices used to obtain financing for non-existent goods or services; duplicate financing the same invoice presented to multiple financiers simultaneously; and supply chain manipulation misrepresentation of the buyer-supplier relationship to obtain more favourable financing terms. AML Law No. 39 of 2015 and CBI AML instructions require banks providing SCF products to implement appropriate transaction monitoring and due diligence on both buyers and suppliers in SCF programmes.

Structuring SCF Programmes for Iraqi Companies

Companies seeking to establish supply chain finance programmes in Iraq should address the following legal and operational considerations: assignment validity ensuring that the underlying supply contracts permit assignment of payment rights to the financing institution; debtor notification establishing a clear mechanism for notifying debtors of assignments, which is required under Iraqi civil law for an effective assignment; confirmation process establishing a mechanism for buyers to confirm invoice amounts and payment obligations as the basis for supplier financing; and dispute resolution addressing the treatment of invoices subject to commercial dispute between buyer and supplier, including whether disputed invoices are excluded from the SCF programme.

International Standards and Iraqi SCF

The Global Supply Chain Finance Forum (GSCFF) has published standard definitions and market practice guidelines for SCF techniques that are increasingly adopted by banks and corporates internationally. Iraqi banks developing SCF products should refer to GSCFF standards to ensure their programmes meet international market practice. The ICC has also published guidance on supply chain finance in the trade finance context. As Iraq’s SCF market develops, alignment with international standards will be important for attracting international bank participation in domestic SCF programmes.

How Etihad Law Firm Assists

Etihad advises Iraqi banks and corporate clients on the legal structuring of supply chain finance programmes, reviews the legal basis for receivables assignment under Iraqi law, advises on CBI regulatory requirements for SCF products, and assists in drafting SCF documentation including master receivables purchase agreements and programme documentation.